Mercantile Bank Corporation Reports Strong Second Quarter 2017 Results

GRAND RAPIDS, Mich., July 18, 2017 /PRNewswire/ -- Mercantile Bank Corporation (NASDAQ: MBWM) ("Mercantile") reported net income of $7.3 million, or $0.45 per diluted share, for the second quarter of 2017, compared with net income of $7.4 million, or $0.46 per diluted share, for the respective prior-year period.  Net income during the first six months of 2017 totaled $15.0 million, or $0.91 per diluted share, compared to $16.0 million, or $0.98 per diluted share, during the first six months of 2016.

"We are very pleased to close the first half of 2017 with a solid quarter that reflects the ongoing success of our strategic initiatives," said Robert B. Kaminski, Jr., President and Chief Executive Officer of Mercantile.  "Our sound financial condition and anticipated new loan fundings make us confident that the strong performance achieved during the first six months of the year can continue throughout the last half of the year."

The second quarter was highlighted by:

• Strong earnings performance and capital position
• Robust net interest margin
• Strong asset quality, as reflected by low levels of nonperforming assets and loans in the 30- to 89-days delinquent category
• New commercial term loan originations of approximately $152 million
• Continued strength in commercial loan pipeline

A bank owned life insurance death benefits claim in the first quarter of 2017 increased reported net income during the first six months of 2017 by approximately $1.1 million, or $0.06 per diluted share, while the repurchase of $11.0 million in trust preferred securities at a 27 percent discount in the first quarter of 2016 increased reported net income during the first six months of 2016 by approximately $1.8 million, or $0.11 per diluted share.  Excluding the impacts of these transactions, diluted earnings per share during the first six months of 2017 and 2016 equaled $0.85 and $0.87, respectively.

Operating Results

Total revenue, which consists of net interest income and noninterest income, was $31.2 million during the second quarter of 2017, up $0.1 million or 0.2 percent from the prior-year second quarter.  Net interest income during the second quarter of 2017 was $27.2 million, up $0.1 million or 0.3 percent from the second quarter of 2016.

The net interest margin was 3.85 percent in the second quarter of 2017, up from 3.73 percent in the linked quarter, but down from 4.01 percent in the prior-year second quarter.  The increase in the net interest margin in the current-year second quarter relative to the first quarter of 2017 primarily resulted from a higher yield on loans and an improved earning asset mix.  The increased yield on loans mainly reflected the positive impact of increased interest rates on variable-rate commercial loans stemming from a 25 basis point increase in the targeted federal funds rate in March of 2017 and again in June of 2017 and a higher level of purchased credit-impaired commercial loan income.  The change in earning asset mix primarily reflected loan growth and a reduction in interest-earning deposit balances.  Higher-yielding average loans represented 86.5 percent of average earning assets during the second quarter of 2017, up from 85.6 percent during the linked quarter, while lower-yielding average interest-earning deposit balances represented 1.6 percent of average earning assets during the current-year second quarter, down from 2.2 percent during the linked quarter.

The decline in the net interest margin during the second quarter of 2017 compared to the prior-year second quarter reflects a decreased yield on average earning assets, primarily reflecting a lower yield on securities, and an increased cost of funds, mainly reflecting higher costs of certain non-time deposit accounts and borrowed funds.  The decreased yield on securities was mainly due to the absence of accelerated discount accretion on called U.S. Government agency bonds being recorded as interest income.  Approximately $1.5 million in accelerated discount accretion was recorded as interest income during the second quarter of 2016, positively impacting the net interest margin by 22 basis points; no accelerated discount accretion was recorded during the second quarter of 2017.  The negative impact of the decreased yield on securities was somewhat mitigated by an increased loan yield, which primarily stemmed from increased interest rates on variable-rate commercial loans resulting from the aforementioned rate hikes and the 25 basis point rate hike in December of 2016, along with a higher level of purchased credit-impaired commercial loan income.

Net interest income and the net interest margin during the second quarter of 2017 and the prior-year second quarter were affected by purchase accounting accretion and amortization entries associated with the fair value measurements recorded effective June 1, 2014.  Increases in interest income on loans totaling $1.3 million and $0.9 million were recorded during the second quarters of 2017 and 2016, respectively.  An increase in interest expense on subordinated debentures totaling $0.2 million was recorded during both the current-year second quarter and prior-year second quarter.  Purchased loan accretion amounts vary from period to period as a result of periodic cash flow re-estimations, loan payoffs, and payment performance.

Mercantile recorded a $0.8 million provision for loan losses during the second quarter of 2017 compared to a $1.1 million provision during the respective 2016 period.  The provision expense recorded during both periods primarily reflects loan growth.

Noninterest income during the second quarter of 2017 was $4.0 million, down slightly from the $4.1 million in noninterest income recorded during the second quarter of 2016.  The decrease in noninterest income mainly reflects lower other income and service charges on accounts, mitigating higher credit and debit card fees, payroll processing revenue, mortgage banking activity income, and bank owned life insurance income.

Noninterest expense totaled $19.9 million during the second quarter of 2017, up $0.7 million or 3.6 percent from the respective 2016 period, generally reflecting expected increases in various overhead costs stemming from recent growth initiatives.

Mr. Kaminski continued: "We are very pleased with the sustained strength and relative stability of our net interest margin, which in addition to benefitting as expected from the recent rate hikes initiated by the Federal Open Market Committee, also received a boost from increased purchased credit-impaired commercial loan income.  In light of our balance sheet structure, our net interest margin should benefit from any further rate hikes.  We continue to seek opportunities to enhance fee income and remain dedicated to meeting growth and expansion objectives in a cost-conscious manner."  

Balance Sheet

As of June 30, 2017, total assets were $3.14 billion, up $60.8 million or 2.0 percent from December 31, 2016.  Total loans increased $149 million or 6.2 percent, while interest-earning deposits decreased $84.6 million or 63.4 percent, over the same time period.  Interest-earning deposit balances declined as a result of these funds being used to meet loan funding requirements, as well as deposit withdrawals stemming from certain commercial customers making tax payments.  Approximately $152 million in commercial term loans to new and existing borrowers were originated during the second quarter of 2017, as continuing sales and relationship building efforts resulted in additional lending opportunities.  As of June 30, 2017, unfunded commitments on commercial construction and development loans totaled approximately $111 million, which are expected to be largely funded over the next 12 to 18 months.

Raymond Reitsma, President of Mercantile Bank of Michigan, noted: "Our lenders' continuing focus on identifying and fostering new customer relationships and serving our existing customer base is depicted by the strong loan growth achieved during the second quarter of 2017.  Our relationship-based approach to banking continues to be well received by clients in our markets.  We remain committed to growing the loan portfolio in a disciplined manner, including an emphasis on both loan pricing and quality.  Based on our current loan pipeline, we are quite confident that we can continue to grow the commercial loan portfolio in future periods.  We are also pleased to report that our residential mortgage loan portfolio grew for the fourth consecutive quarter, reflecting the ongoing success of strategic initiatives that were implemented to increase market penetration."

Commercial and industrial loans and owner-occupied commercial real estate ("CRE") loans combined represented approximately 50 percent of total loans as of June 30, 2017.  Non-owner occupied CRE loans equaled about 31 percent of total loans as of June 30, 2017. 

As of June 30, 2017, total deposits were $2.37 billion, down $4.3 million from December 31, 2016, but up $91.0 million from June 30, 2016.  Local deposits were down $21.7 million since year-end 2016, but up $94.0 million over the past twelve months.  The reduction in local deposits was mainly due to certain commercial customers making tax payments, while the growth in deposits was primarily driven by new commercial loan relationships.  Wholesale funds were $339 million, or approximately 12 percent of total funds, as of June 30, 2017, compared to $251 million as of December 31, 2016 and $275 million as of June 30, 2016.

Asset Quality

Nonperforming assets at June 30, 2017 were $7.2 million, or 0.2 percent of total assets, compared to $7.8 million, or 0.3 percent of total assets, at March 31, 2017, and $6.4 million, or 0.2 percent of total assets, at December 31, 2016.  The level of past due loans remains nominal, and loan relationships on the internal watch list have remained relatively consistent in number and dollar volume.  Net loan charge-offs were $0.7 million during the second quarter of 2017, or an annualized 0.12 percent of average loans, compared with net loan charge-offs of $0.3 million in both the linked quarter and prior-year second quarter (annualized 0.05 percent and 0.04 percent of average loans, respectively).

Capital Position

Shareholders' equity totaled $357 million as of June 30, 2017, an increase of $16.7 million from year-end 2016.  The Bank's capital position remains above "well-capitalized" with a total risk-based capital ratio of 12.7 percent as of June 30, 2017, compared to 13.1 percent at December 31, 2016.  At June 30, 2017, the Bank had approximately $76 million in excess of the 10.0 percent minimum regulatory threshold required to be considered a "well-capitalized" institution.  Mercantile reported 16,480,852 total shares outstanding at June 30, 2017.

No shares were repurchased during the first six months of 2017 as part of the $20 million stock repurchase program that was announced in January of 2015.  Future share repurchases totaling $15.5 million can be made under the program, which was expanded by $15 million in early 2016.

Mr. Kaminski concluded: "Our strong financial performance during the first six months of 2017 positions us to meet growth and profitability objectives and further enhance shareholder value.  Our commitment to increasing shareholder value is also depicted by our cash dividend program, including the announcement of an increased third quarter dividend earlier today.  We continue to be successful in gaining new clients by using a value-added approach and offering a wide-range of products and services, and we are excited about the opportunities that are available to us as we seek out potential customers in our markets."

About Mercantile Bank Corporation

Based in Grand Rapids, Michigan, Mercantile Bank Corporation is the bank holding company for Mercantile Bank of Michigan.  Mercantile provides banking services to businesses, individuals and governmental units, and differentiates itself on the basis of service quality and the expertise of its banking staff. Mercantile has assets of approximately $3.1 billion and operates 49 banking offices.  Mercantile Bank Corporation's common stock is listed on the NASDAQ Global Select Market under the symbol "MBWM."

Forward-Looking Statements

This news release contains comments or information that constitute forward-looking statements (within the meaning of the Private Securities Litigation Reform Act of 1995) that are based on current expectations that involve a number of risks and uncertainties. Actual results may differ materially from the results expressed in forward-looking statements. Factors that might cause such a difference include changes in interest rates and interest rate relationships; demand for products and services; the degree of competition by traditional and nontraditional competitors; changes in banking regulation or actions by bank regulators; changes in tax laws; changes in prices, levies, and assessments; the impact of technological advances; governmental and regulatory policy changes; the outcomes of contingencies; trends in customer behavior as well as their ability to repay loans; changes in local real estate values; changes in the national and local economies; and other factors, including risk factors, disclosed from time to time in filings made by Mercantile with the Securities and Exchange Commission. Mercantile undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events or otherwise.